We live in a new world economy characterized by financial globalization and historically low interest rates. This paper presents a simple analytical framework that helps us understand how this new world economy works from the perspective of an emerging economy. Financial globalization gives rise to episodes of large capital inflows followed by sudden stops. Low international interest rates give rise to asset bubbles that pop and burst. The analysis provides novel answers to old questions: What are the effects of asset bubbles on capital flows and macroeconomic performance? How do these effects vary in normal times and during sudden stops? How should policymakers manage capital flows in this new environment?

We acknowledge support from the Spanish Ministry of Science and Innovation (grant ECO2011-23197), and the Generalitat de Catalunya AGAUR (grant 2014SGR-830). In addition, Ventura acknowledges support from the ERC (Advanced Grant FP7-249588-ABEP), and Martin the ERC (Consolidator Grant FP7-615651-MacroColl), and the IMF Research Fellowship.